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Highlights from 2023

WHAT A YEAR!!!!

Let me start with a simple display of the remarkable returns we saw in the markets this year.

S&P 500   24.2%

Dow Jones Industrial Average  13.7%

Nasdaq 100  43.4%

This marks the Nasdaq’s best return in 23 years.  Before I go into some thoughts on the year, let me first begin with a small snippet of what I wrote in the newsletter last year to forecast what I thought would happen in 2023.

“I believe 2023 is shaping up to be more of what I had initially expected last year, 8%-10% should be the expected market returns. This is not an exact science, so who knows if I will be correct. But I will insist on one thing……it is BEST to be selective with investments and pick and choose where to place money. This year will be critical for active money managers, like ourselves, because it is easier for us to avoid stocks that we know would have a hard time during a rising interest rate environment and focus on those that will tend to do well.”

While the markets exceeded my and everyone’s expectations, I was dead right on stock selection/active management being critical to returns.  While in 2023, the magnificent 7 as they have been dubbed (Apple, Nvidia, Microsoft, Google, Meta, Tesla, Amazon) led the markets into the outsized returns.  Without those seven stocks factored into the overall return figures, the Nasdaq would have gained 23% less or 33.34% on the year.

Let me get into the factors that led the year into its overall returns. 

  1. Drop in Inflation– this was the million-dollar question coming into this year.  Would inflation prove to be “transitory” or would it be around for a while.  While the Fed did its part to curtail inflation, it was indeed a short-lived phenomenon.  I recall writing about timber prices and their run up from $500 to $1800 and back down.  Most commodities ended up having the same fate.  Remember when oil hit $100 per barrel or egg prices had risen to almost double? Thankfully, all of those declined and allowed the Fed to ease the rate hiking cycle.
  2. Regional Bank crisis was contained and short lived– recall in March when Silicon Valley Bank went under and the markets were looking for which regional bank would be next?  Much credit should be given to the Fed here as regulators stepped in swiftly and opened the Fed window to purchasing any US Bonds at 100% of their value.  This helped to secure many bank’s balance sheets and ensured no other bank failed due to maturity risk.
  3. The Federal Reserve halted rate hiking cycle – this is more of a recent occurrence but important nonetheless as markets now see clear skies.  I try to mention as often as I can that markets love certainty.  With the Federal Reserve no longer raising rates, markets could focus on balance sheets, earnings and an economic environment that is friendly to growth and expansion.  This has led the markets to finish an already good year, even better!
  4. Earnings rebounded– this was a key reason for the market holding up in the middle months.  Most economists thought there would be an earnings recession in 2023.  Lots of companies however did not report as bad as expected earnings but rather grew revenues.  This above anything else brought strength to the rally in 2023. 

Market Predictions for 2024

I believe the markets will follow this year with another positive return in 2024.  I believe the indexes have a shot to not only make new all-time highs but staying there. In terms of a numeric return, I believe the markets can see 8%-15% return.  I would like to highlight areas that I think will be critical to the market returns in the coming year.

A.I. – Artificial Intelligence will continue to be an “arms race” amidst most corporate boards. As the U.S. labor force struggles to replace the baby boomer generation of retirees, investments in automation will play a critical role in our economy’s expansion in years to come.  Consider this the next coming of the “internet” growth cycle….we will see many cottage industries being created out of a necessity to find ways to reengineer jobs.  As an aside, this will also help drive profit margins!

Breath- stocks will rally but the majority of gains will come from a broader subset of stocks than just the magnificent seven.  I believe the market expands and we see more participation in the well-being of the economy via different sectors as well as a variety of company sizes.

Interest Rate declines- When the Fed lowers rates, small caps will do very well.  As rates decrease, this is a general catalyst for stocks on the whole, but especially for smaller companies who need a robust and expanding economy. 

Consumer remains strong and “cash on sidelines” gets placed into the markets- one thing markets I think are severely underestimating is that the wage growth that has taken place over the last couple of years is permanent and has allowed the consumer to keep spending.  Also, there are lots of investors that had mistrusted the market’s gains and remained sidelined, kept cash in liquid instruments like money markets/CD’s and as rates decline, they will put that cash to work in stocks for a fear of further missing out on good market returns.

Parting Thoughts

I welcome an opportunity to discuss the above detail and wish you much success in 2024!

Regards,

E.Palacios

Erick J.  Palacios, MBA

Plan to Prosper Wealth Management’s clients & employees will from time-to-time hold securities mentioned above. Commentary is not endorsements or recommendations of any securities.